Dear Mr. Berko: I lost $19,000 in the Chinese stock market because I didn’t see the bubble coming. I believe that our market has topped out, and I think the Indian stock market looks very attractive now that China’s economy has stalled. What can you tell me about the Indian stock market and India’s economy? What stocks would you recommend in India?
— L.L., Waterloo, Iowa
Everybody likes the Indian market and the Indian economy. But when “everybody” hops on those ubiquitous Indian buses with all those cooking pots, goats and chickens, it’s time to disembark.
I’ve been to India frequently — traveling for weeks with a backpack and tent, by horse, by foot and by bus from Jammu and Kashmir to New Delhi and Hyderabad. During a dozen trips, I’ve learned a lot about the country, its 1.25 billion people, its merchant and privileged classes, and its government bureaucracy. And I don’t trust the privileged class, which thrives on its mutualistic, symbiotic financial relationship with a blatantly corrupt government. Regardless of the good economic numbers reported by New Delhi — e.g., 7.5 percent gross domestic product growth, a 3 percent increase in government revenues, 2 percent inflation and corporate profits gaining 16 percent — I’m mindful that New Delhi’s bureaucrats and politicians are genetically incapable of speaking the truth. From my catbird seat, it looks as if the Indian market and the Indian economy are topping out.
Mark Twain humorously divided the world into two kinds of people: those who have seen the Taj Mahal, which is terribly disappointing, and those who haven’t. A similar comment could be said of American investors; there are those who are familiar with Indian investment opportunities (they are few) and those who are not (whose numbers are legion).
There are two major stock exchanges in India. The Bombay Stock Exchange, established in 1875, is located in Mumbai and lists over 6,000 companies. The BSE is among the world’s largest based on the number of shares it lists. The National Stock Exchange of India, also based in Mumbai, founded in 1992, has most of the sophisticated electronic and computer trading systems found on U.S. exchanges. The NSE trades 1,216 issues; however, 700 of those issues have almost no liquidity and constitute 8 percent of the NSE’s capitalization. Meanwhile, many of the executives who manage India’s public companies are as crooked as a barrel of fishhooks. The NSE controls over 70 percent of the spot market trading and has a complete monopoly on derivative trading. Therefore, I trust these markets only a little more than I would trust a member of our Congress.
Why would you invest in a country about whose language, people and culture you know nothing — particularly one with an accounting system that only accounts for what looks good and doesn’t conform to U.S. standards? Dividends are paid in rupees. Financial reports, published in Hindi or Bengali, read like comic strips. And the Indian version of our Securities and Exchange Commission reminds me of a Keystone Kops comedy. Fraud, self-dealing, insider trading and cooked books are rampant and accepted business practices. The Indian market is as risky as the Chinese market, and when the economy slows, which will be sooner than later, equities will fall like coconuts from tall trees.
If you must commit financial hara-kiri, consider the iShares India 50 ETF (INDY-$27), which owns 50 of India’s largest equities. State Bank of India, ITC, Sun Pharmaceutical Industries, Tata Consultancy Services, ICICI Bank, Infosys, Reliance Industries and Housing Development Finance Corp. are several of the best-known examples. The return to date is negative 8.05 percent, and the paltry 15-cent dividend yields 0.54 percent. Or consider the Standard Poor’s CNX 500 (CNXFIVE.NS-6,583.22), India’s broad-based stock market index, representing approximately 96 percent of the NSE’s market capitalization and 93 percent of the NSE’s trading volume. The CNX’s 500 companies are segregated into 73 industry indexes so that an industry’s weight in the index reflects its influence in the market. For instance, if the pharmaceutical sector has a 4 percent weight among the 500 stocks traded, the securities in that index would also have a 4 percent weight in the index. The CNX is almost 1,000 points from its 52-week high of 7,428.10. Are you listening?
Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or firstname.lastname@example.org.